NEWS

Brexit Adds Negative Outlook For Canadian Auto Parts Sector Companies Hit Analyst Downgrades

Thursday, Jun 30, 2016

Canadian auto parts manufacturers Magna International Inc., Linamar Corporation, Exco Technologies Ltd and Martinrea International Inc. were hit with analyst downgrades Tuesday, adding to the sector’s woes in wake of the United Kingdom’s vote to leave the European Union.

BMO Capital Markets announced it was revising its target price on Magna to US$36 from US$50, on Linamar to US$50 from $75, on Exco to US$13 from and on Martinrea to US$7 from US$11.

The global auto sector has been hit by falling stock prices in recent days, as fears that a formal U.K. exit from the European Union could lead to costly tariffs on cars and auto parts exported from Britain to Europe.

S&P Global Market Intelligence last week said that the Brexit vote will lead to economic uncertainty that will cause a decrease in the number of new vehicles sold in the U.K., which it said accounts for 3.4 per cent of global new-vehicle sales.

“The economic uncertainty that will arise from the Brexit over the next several years as Britain negotiates its new relationship with the European Union will likely dampen consumer confidence across Europe, which would negatively impact new vehicle sales,” said BMO Capital Markets analyst Peter Sklar.

BMO estimates that Europe represents about 35 per cent of Magna’s consolidated production revenues and 20 per cent of its earnings before interest and taxes — and that German-based Volkswagen, BMW and Daimler make up 70 per cent of its European revenues.

Britain mainly exports cars and auto parts to Germany. According to the Germany’s Federal Statistical Office, last year Britain exported €38.3 billion in cars and auto parts to Germany — placing ninth on the list of importers.

Last month, Magna announced plans to build a 225,000-square-foot aluminum casting facility in Telford, U.K., that it said would create up to 295 jobs.

Linamar, which recently acquired France-based casting company Montupet, now must manage that company’s portfolio of European-based equipment manufacturers, including Renault which accounted for 25 per cent of its revenues last year.

BMO estimates that Europe will comprise 25 per cent of Linamar’s business. It also said that Europe represents about 15 per cent of Martinrea’s business and about 40 per cent of Exco’s business.

“There have been other emerging developments that are supporting a negative outlook for the sector,” said Sklar, citing rising incentive spending, off-lease vehicles entering the market and unsteady vehicle sales trends in China.

Sklar also said that existing concerns about U.S. light vehicle sales are also impacting Canadian auto parts manufacturers. U.S. light vehicle sales declined in May by six per cent from 2015, according to Autodata Corp.

Auto parts suppliers around the world have been hit hard by the Brexit news.

The day following the referendum, shares in U.S.-based BorgWarner and Delphi fell 10.5 per cent and Delphi 11 per cent respectively.

Japanese auto companies, with the yen surging against major currencies, have also been subject to major duress. Japan’s auto sector, which makes most of its sales abroad, was the beneficiary of surging profits in recent years because of its weakened currency. The country’s Industry Ministry convened a meeting in Tokyo with top auto industry officials on Monday to discuss the Brexit fallout.

 

Source : financialpost.com